Reference Dependence and Choice Overload

This paper offers an explanation for choice overload based on reference-dependent preferences. Consumers construct an ideal object that combines the best attributes of all objects in their choice set, and use this as a reference point. When the choice set expands, it is more likely to find a better object, but meanwhile the reference point improves, which makes all existing objects appear worse. We characterize when the latter reference-dependence effect dominates such that choice overload arises. We also show that purchase probability can decrease with object complexity, measured by the number of attributes.